Evening Market Update

Equities Fall on Higher Input Costs

Stocks ended the week on a down note, digesting the lower guidance due to higher input costs reported by retailers Gap Inc and Aeropostale, as well as continued worries about the eurozone debt crisis. Meanwhile, despite the dollar strengthening, crude oil gained, adding to the concerns over commodity prices, and Treasuries gained on a risk-aversion trade. However, there were positive reports from Foot Locker Inc and cloud computing software firm Salesforce.com Inc, and Barnes & Noble Inc received a nearly $1 billion acquisition proposal from Liberty Media Corp.

On friday, the Dow Jones Industrial Average fell 93 points (0.7%) to 12,512, the S&P 500 Index decreased 10 points (0.8%) to 1,333, and the Nasdaq Composite declined 20 points (0.7%) to 2,803. In moderate volume, 994 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil closed $1.17 higher at $100.10 per barrel, wholesale gasoline rose $0.01 to $2.94 per gallon, and the Bloomberg gold spot price increased $20.14 to $1,513.41 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-rose 0.6% to 75.58. For the week, including dividends, the DJIA lost 0.7%, the S&P 500 Index fell 0.3% and the Nasdaq Composite declined 0.9%.

Gap Inc. (GPS $19) fell over 15% after the retailer lowered its full-year EPS outlook from a range of $1.88-1.93 to between $1.40-1.50 as the company expects business performance during the year to be "heavily impacted by pressure from sourcing cost inflation." Analysts surveyed by Reuters were expecting the company to achieve full-year EPS of $1.91. GPS said while it anticipated that the cost of goods would increase during the back-half of the year, costs are actualizing above initial estimates. The company expects costs per unit to be up about 20% in the back-half of the year, which will "more than outweigh retail price increases." The guidance accompanied its 1Q EPS report, in which it posted profits that were a penny ahead of analysts' estimates, while revenues were inline with expectations.

Fellow retailer Aeropostale Inc. (ARO $18) was also down nearly 15% after the company issued a 2Q EPS outlook that was well below expectations, “based on current business trends and uncertainty surrounding the retail environment in the back-half of the year. "ARO said its outlook reflects its plans to aggressively clear spring inventories while saying it would not update its full-year outlook as its tries to regain clarity in its merchandise assortments, mitigate industry-wide cost increases, and manage its cost structure “conservatively and carefully." ARO posted 1Q earnings and revenues that matched expectations.

However, all was not bad in the retail sector, with Foot Locker Inc. (FL $25) higher by over 10% after the shoe and apparel company reported 1Q EPS of $0.60, well above the $0.44 that the Street was looking for, as revenues rose 13% year-over-year (y/y) to $1.5 billion, compared to the $1.3 billion that analysts had estimated.

Salesforce.com Inc (CRM $147) shares were solidly higher Friday after the company reported top-line results for 1Q that beat expectations and strong bookings growth, and raised its full-year revenue and earnings guidance. CRM reported that it became the first enterprise cloud computing company to exceed a $2 billion annual revenue run rate, and that while revenues rose 34% y/y, EPS growth was slower due to spending on R&D and growth of its salesforce, while deferred revenue rose 38%.

In M&A news,  Liberty Media Corp. (LCAPA $88) announced that it has made a proposal to acquire Barnes & Noble Inc. (BKS $18) for $17 per share in cash, or nearly $1 billion. The company said its proposal is subject to various conditions, including satisfactory financing and the participation of BKS' Chairman Riggio, both in terms of his continuing equity ownership and his continuing role in management. BKS confirmed it has received the offer and will evaluate the proposal. Shares of BKS were up nearly 30%, while LCAPA was lower.

Economic calendar ends the week on a quiet note

Treasuries gained ground on Friday, taking their cue from the action in the stock market, as there were no major economic reports today, with the yield on the 2-year note down 1 bp to 0.51%, the yield on the 10-year note lower by 2 bps at 3.15%, while the 30-year bond rate was unchanged at 4.30%.

This week saw mostly disappointing data from the economic front, as the Index of Leading Economic Indicators snapped a nine-month growth streak. Moreover, manufacturing activity slowed, with the Empire Manufacturing Index and the Philly Fed Manufacturing Index both decelerating by much larger amounts than economists had expected, and industrial production came in flat. Meanwhile, housing remained depressed, as housing starts and building permits, existing home sales, and homebuilder sentiment failed to improve as had been projected.

However, the minutes from the April monetary policy meeting of Federal Reserve policymakers showed that the Central Bank will remain accommodative to the economic recovery for the foreseeable future as its discussions regarding an exit strategy showed a consensus on the proper protocol of tightening policy was far from being reached. Also, if there was a silver lining in the week's data, it was on the employment as the related components in the aforementioned regional manufacturing reports both showed improvement and weekly initial jobless claims fell back to near the 400,000 mark, following recent jumps.

Meanwhile, news on the equity front was mixed on the week, with better-than-expected earnings reports from Dell Inc (DELL $16) and Home Depot Inc (HD $37), while competitors Hewlett-Packward Co (HPQ $36) and Lowes Companies (LOW $25) disappointed. Meanwhile, the IPO of social network firm LinkedIn Corp. (LNKD $95), which more than doubled on its first day of trading, also garnered attention.

No new stimulus from Japan and Europe government debt concerns weigh

Sentiment ticked lower Friday, courtesy of economic uneasiness and continued sovereign debt worries out of Europe. The Finance Ministry in Germany Europe's largest economy-warned in its monthly report that the nation's economic growth may slow beginning in the middle of the year, per Bloomberg. Moreover, a report showed German producer prices rose more than economists expected in April. The data overshadowed a separate report that showed Italian industrial orders rose much more than was estimated for March.

Meanwhile, the eurozone sovereign debt crisis added to the bearish tone, as Fitch downgraded Greek government debt, stating that "re-profiling," or extending maturities on debt, constituted a default, similar to what Standard & Poor's said in their last downgrade earlier this month. Fitch also noted the "scale of challenge" Greece faced in implementing "radical fiscal and structural reforms" needed to secure solvency for its downgrade. Additionally, the uncertainty of whether a maturity extension would trigger credit default swaps insuring Greek debt added to traders' hesitancy. Lastly, regional elections in Spain over the coming weekend, where Prime Minister Zapatero's Socialist Party is expected to lose power, added to the uncertainty.

In Asia/Pacific, the Bank of Japan (BoJ) held its monetary policy unchanged despite Thursday's second-straight quarterly contraction in the nation's 1Q GDP and as the country tries to rebound from March’s devastating earthquake and tsunami. Elsewhere, South Korea's financial and construction sectors fell after a warning about real estate loans possibly going bad amid the prolonged slump in the property market, per Reuters.

Elsewhere in the Americas, Canada's economy showed signs of slowing, as retail sales in March were little changed, despite estimates of a 0.9% gain, while April's CPI gained a lower than expected 0.3% month-over-month on declines in prices of food, clothing and household operations (non-shelter).

Europe may be focus next week as US economic news slows

Markets may be focused on further developments out of Europe next week, both in terms of the situation in Greece and Spain's regional elections, while US economic releases slow down. After a week of disappointing housing data, the reaction may be muted to Tuesday's new home sales report, expected to gain 1.7% m/m in April to an annual rate of 305,000 units after jumping 11.1% in March to 300,000. However, the new home sales report is considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales, which unexpectedly fell 0.8% m/m, uses closings.

Later in the week, the second reading of 1Q gross domestic product (GDP) is expected to be revised higher to 2.2% from a 1.8% quarter-over-quarter (q/q) annualized rate, while still slower than the 3.1% rate experienced in 4Q. Within the upward revision, personal consumption is forecasted to rise 2.8% from the initially reported 2.7%. Inflation readings are expected to be unchanged, with the GDP Price Index coming in at a 1.9% gain, and the core PCE Index, which excludes food and energy, to increase 1.5%.

Other releases on the US economic calendar include the volatile durable goods orders report, expected to fall 2.4% in April after gaining 2.5% m/m in March, while ex-transportation, orders are forecasted to have risen 0.5% m/m after increasing 1.3% in March. The week also includes the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, personal income and spending, the final University of Michigan Consumer Sentiment Index reading for April, and pending home sales.

International economic releases due out next week include Japan's leading index, CPI, and retail sales, Australia's leading index, Taiwan's unemployment rate and leading index, Hong Kong's trade balance, and HSBC's preliminary reading on China's May PMI. Releases from Europe will include euro-zone manufacturing and services PMIs, Germany's final 1Q GDP, and IFO survey of business confidence, consumer confidence, import prices and CPI, and UK preliminary GDP and consumer confidence. Back in the Americas, Brazil announces its unemployment rate and central bank of Mexico meets, where no change is expected.